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How Your Rate Lock Works
Low Mortgage Rates: Get Your Rate Lock Now!
January 8, 2012

Mortgage rates are at an all-time record low. If you are thinking of buying a home, now is the
time to secure a rate lock. Some lenders refer to this term as a lock-in or a rate commitment.

When you are shopping for a mortgage the rate quoted is not always the rate you receive on
settlement. Sometimes you see rates advertised in the newspapers or on television. You do
not always get that rate.

With a rate lock, the lender promises to give the borrower a specific mortgage rate. The
lender further promises to hold the rate for a period of time. Usually it is for 30 days, but 60
days is becoming more common. All this information is spelled out in a written document.

The rate lock not only guarantees the mortgage rate, but it also addresses other issues with
the mortgage. It specifies the loan to value, and the points. The lower the loan to value ratio,
the lower the rate the lender will guarantee.  For example, if you are buying a house with a
25% down payment, your loan to value ratio is 75%. Now, if you use a down payment of 10%,
the loan to value ratio is 90%. The lender will offer a better rate and better terms with the
higher loan to value ratio.

Be sure to have your points capped in the rate lock. Point are the expenses of arranging a
mortgage, buying a house and closing the deal. One point is the equivalent of 1%. In many
mortgage transactions the lender will give the borrower the option of paying this amount at
closing, or adding the amount into the mortgage total.

A rate lock is not free. Lenders will charge for this option and some will ask for the fee
upfront. The important thing to remember is that there are no guarantees until the borrower is
approved for the loan. If the borrower pays the fee upfront and is subsequently denied a loan
from the lender the fee is not refunded. However, if the loan is approved and the lender gets
the business, in most cases fee will be waived or refunded.

An important issue with rate locks is what occurs when interest rates fall. Generally, the focus
is on when rates rise. The homebuyer wants to protect himself from rising rate. However, he
should also protect himself from falling rates. For example, if the borrower negotiates a rate
of 4.5%, and rates rise to the 5.0% mark, he is happy because he had the foresight to lock in
his rate. What happens when the rate falls to 4.0%? Legally, the homebuyer is stuck with the
4.5% rate. There should be a clause that specifies that if rates fall, the borrower will receive
the lower rate.

Now that we all agree that a rate lock is a good strategy, the big question is when would be
the best time to get a rate lock. If you get the rate lock early, before you shop for a house, it
could mean that the rate lock could expire before you sign a contract to purchase a house.
You might incur a fee which is non-refundable. There is also a cost for extending the rate lock
period. Most lender charge 0.25% of 1 point for an extension of 15 days. This could be
unavoidable if you find a house towards the end of the rate lock period.

The best strategy in getting a rate lock.

1. Get a pre-approval from your bank.

2. Find the house you want to buy and get it under contract.

3. Get the rate lock secured.